Friday, May 6, 2011

Dollar graph of the day

Interesting graphic in the Economist which tracks the fortunes of dollar since the abandonment of the Bretton Woods system in the early 1970s. The dollar has halved since 1985.

But is the falling dollar a cause for concern? As the report points out, though the weaker currency is good for America's export competitiveness, it adversely affects America's creditors. They face the combination of low yielding US Treasury Bonds and a depreciating currency.

However, as Paul Krugman recently blogged, the dollar's position as the preferred global reserve currency (exorbitant privilege) confers certain advantages on the US with a depreciating dollar. Since all its debts, including external, are denominated in its own currency, any currency depreciation benefits the US by reducing the real debt burden. Further, it also means that its households do not have to face balance sheet problems arising from excessive exposure to foreign currency debts.

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